March 19, 2014
- The “re-industrialization” of America, affirmed by a (foreign) industrial giant
- $440 million in new wealth per day… and how to grab a $2.8 million share in two months
- Waiting on the Fed: An Abbreviated History of Forward Guidance (FoGu)
- He lost his touch, and then he lost his mind: Neil George on Warren Buffett
- The Russo-Chinese conspiracy during the financial crisis… Casey’s famous gold analogy revisited… reader invents another new word (a phrase, really)… and more!
“We believe that the U.S. energy transformation is a once-in-a-lifetime moment,” said the CEO of an industrial giant. “And we have our chance, each of us, to make it our moment.”
Significantly, the CEO did not hail from American industrial giant. Instead, it was Germany’s Siemens — with a $111 billion market cap bigger than United Technologies or 3M.
Siemens CEO Joe Kaeser ventured to an energy conference in Houston two weeks ago. He said new and plentiful U.S. energy is bringing about the “re-industrialization” of the United States. He suggested he’d bring more operations here, no matter which direction the boom goes: If oil will be transported by pipeline, Siemens can make pipelines more efficient. If oil will be transported by rail, Siemens makes locomotives.
“We’re ready to go — because we’re on top of the global energy agenda,” Kaeser said. “And we believe in the U.S. energy story.”
“We keep raising our forecasts, and we keep underestimating production,” says an analyst with the International Energy Agency.
Ditto for the U.S. Energy Information Administration. We shared the numbers on Monday — U.S. production of 7.5 million barrels a day last year, the most since 1989. Production is set to equal the 1970 peak by 2019.
Here’s another way of looking at the numbers. Barely a decade ago, the United States imported six out of every 10 barrels of oil it consumed. As of 2012, it was only four in 10. And the numbers only stand to improve further…
“The U.S. oil turnaround is stunning,” says our resident oil field geologist Byron King. “Looking ahead by just over five years, to 2020, expect that U.S. oil production will continue to grow by as much as 4.4 million barrels per day (MB/d) over what it is now. The U.S. is on track to be the world’s leading oil producer, beating out Russia and Saudi Arabia by a wide margin.”
“Think about that number, too,” says Byron — “4.4 million ‘new’ barrels every day. That’s current output PLUS 4.4 million more.
“At, say, $100 per barrel, that’s $440 million per day of new wealth coming to the surface. U.S. landowners will make money. Drilling companies will make money. Service companies will make money. Oil companies will make money. Governments will cash big tax checks — and of that you can be sure!
“Meanwhile, U.S. refineries are producing pretty much everything that the U.S. economy needs. That and much more, because the U.S. has become a net exporter of refined products. It’s not a bad thing, either. Take a $100 barrel of crude oil, refine it into $250 worth of product and then export the product. With economics like that, it’s no wonder that U.S. refinery usage is at a historic high.”
Byron’s readers have had the chance to parlay this transformation into impressive gains — up to 45% in less than a year. But now he’s ready to take his readers to the next level.
In less than 24 hours, you can be the first to know about his new energy strategy — one that generates profits 178 times greater… and 216 times faster… than conventional “Big Oil” plays.
Access to this briefing is absolutely free… but you get this first-mover advantage only if you sign up in advance. Once you do, you’ll be assured of getting an email tomorrow at 1 p.m. EDT with a link that takes you to our virtual “briefing room”… and Byron will walk you through the whys and wherefores of a strategy that can turn a mere $500 into $2.8 million — in only 60 days. Act here to guarantee you’ll be among the first to know.
Stocks are in suspended animation until the Federal Reserve issues its latest proclamation around the time this episode of The 5 hits your inbox.
As we write, the Dow and the S&P are up a bit, the Nasdaq and the Russell down a bit. S&P 500 is up a point, to 1,873. “Stocks are recovering from a few down days and are back to pushing toward new highs,” says Greg Guenthner of our trading desk. “Despite what any of the crash police are telling you, this remains a buy-the-dips market.”
Gold slid below $1,350 overnight. That’s the key technical level Greg’s been eyeing for weeks. Whether it stays below $1,350 depends largely on whatever the Fed’s Open Market Committee does this afternoon.
Currency Wars author Jim Rickards is on board with conventional wisdom: The Fed will continue to “taper” its bond purchases another $10 billion per month. Janet Yellen won’t “walk into her first FOMC meeting as chair and tear up policy.”
So the mystery lies in that ugly buzzword “forward guidance” — that is, when will they start raising the fed funds rate from near-zero levels first implemented during the Panic of 2008?
Recall the definition of “forward guidance” from the Essentialist’s Glossary at The Daily Reckoning…
Maybe for brevity’s sake, we’ll call it “FoGu.” Which, when you think about it, sorta rhymes with the Fed’s attitude toward savers.
We possess no special insight into the shape FoGu will take this afternoon. But when you hear or see the news, you might benefit from an Abbreviated History of FoGu. The Fed has promised us an “exceptionally low” fed funds rate…
- …first “for some time” (December 2008)
- …then “for an extended period” (March 2009)
- …which morphed into a target date of “at least through mid-2013” (August 2011)
- …stretching to “at least through late 2014” (January 2012)
- …stretching further to “at least through mid-2015” (September 2012)
- …which became “as long as the unemployment rate remains above 6.5%” (December 2012).
Last December, the Fed finally ashcanned the “exceptionally low” language, perhaps out of embarrassment, in favor of “the current target range” — which it said would be maintained “well past the time that the unemployment rate declines below 6.5%.” For the record, it’s now 6.7%.
The Pied Piper of FoGu is an academic at Columbia named Michael Woodford. In August 2012, he did a presentation on FoGu at the annual gathering of central bankers in Jackson Hole, Wyo. By many accounts, it was an instant hit, especially with Janet Yellen.
The buzz is that Woodford thinks the whole unemployment yardstick is so 18 months ago, for the reason we document nearly every month — so many people have departed the workforce that the unemployment rate is even more useless now than it was before 2008.
Instead, Woodford, we’re told, is partial to a GDP target.
Just swell. Now our monetary policy will be keyed to not only a manipulated statistic, but a meaningless one.
“Maybe we are beginning to understand why Berkshire Hathaway has underperformed the S&P 500 for the last many years,” says our income specialist Neil George.
Last summer, Neil penned an article for Lifetime Income Report readers titled, “The Sage of Omaha Has Lost His Touch.” Berkshire chairman Warren Buffett’s latest shareholder letter, issued earlier this month, fessed up to underperformance. “While he apologized for the past five years,” says Neil, “it’s actually been that way for the past 10 years.
“Warren can’t keep up with the smaller and younger investment managers anymore. It’s not his age, per se, but the size of the investment that Buffett has to work with.
“If he stuck to his knitting and bought small to midsized businesses generating lots of cash — like he did back in the 1960s — Berkshire would be blooming with more bucks.”
Never mind losing his touch: “Now Buffett admits he is losing his mind,” says Neil.
“The NCAA men’s college basketball tournament starts this week, and folks around the world are predicting the winners by filling out brackets. Buffett is using the tournament as an excuse to put $1 billion of Berkshire Hathaway stockholders’ cash on the line. The company is providing insurance for Quicken Loans’ huge cash prize to anyone who successfully picks the winner of every tournament matchup.
“The odds are small — but is this something that Berkshire investors should be messing with? Even Buffett told CNBC, ‘I should be institutionalized.'”
Neil thinks you’re far better off buying a firm that operates much the way Berkshire did back in the day. It outperforms both Berkshire and the S&P… and it sports an 8% dividend. Look here for access to Neil’s research.
“I was wondering,” a reader writes, “if Russia could get a representative of the U.S. and of the European Union and ask them to give their choice of Russia selling, say, $5 billion of U.S. bonds each day or cutting off the flow of gas to Europe.
“If they did not give a unanimous decision in 24 hours or lift sanctions, then Russia would do both until the sanctions were lifted.
“I think that would be a discussion that I would like to hear.”
The 5: For whatever it’s worth, former Treasury Secretary Hank Paulson says the Russians proposed joining forces with China to tank Fannie Mae and Freddie Mac securities during the Panic of 2008. Well, worse than those securities had already tanked.
“The Chinese were the biggest external investor holding Fannie and Freddie securities,” he recalls to the BBC, “so the Chinese were very, very concerned.
“I’m not going to name the senior person, but I was meeting with someone… This person told me that the Chinese had received a message from the Russians which was, ‘Hey let’s join together and sell Fannie and Freddie securities on the market.’ The Chinese weren’t going to do that, but again, it just, it just drove home to me how vulnerable I felt until we had put Fannie and Freddie into conservatorship [and gave them explicit U.S. Treasury backing].”
“Russia’s richest man, Alisher Usmanov, has just announced he has sold all his stock in Apple and Facebook to concentrate on the Chinese company Alibaba,” another reader writes.
“What are the odds he did this, partly at least, at the ‘suggestion’ of the man in the Kremlin? Mr. Putin may have just fired a shot across Mr. Obama’s bow. If he ‘suggests’ to all the wealthy Russians that it might be wise to withdraw their money from American, or other Western, investments, what effect might that have on our economies?
“Don’t forget, also, that he can do what he wants with much of Western Europe’s gas supply — maybe demand payment only in rubles or yuan. What will be our European ‘friends” reaction to a squeeze on that front? Mr. Obama is used to politics, Chicago-style, but Mr. Putin is more like one of the old-style Chicago mob bosses. He plays for keeps.”
“I am so tired,” writes a frustrated reader, “of the hate mail and discussion about gold versus Greg Guenthner. Is he right, is he wrong? I find the information he presents food for thought. I waited over a year to buy an option on GDX, confirmed with Greg’s analysis as well as others.
“Folks, there is more than one opinion out there to rely on and combine to make your decisions. Why the continual lambasting of one technical analyst.
“Hey, if you’re having trouble deciding on gold, buy real estate and get a consistent ROI, and quit whining about your investment in gold.”
“At the 3:55 mark yesterday,” writes one more reader on gold, “the reader’s analysis, as far as I have been able to observe, is absolutely dead-on, and that is why right now I am so heavily invested in gold mining stocks in my portfolio.
“Think of it this way: Gold has to go up with all of the fiat money printing going on in the world, and many governments in the world are trying their best to keep it down — most notably the U.S. and England — while at the same time running up huge fiscal deficits. That absolutely cannot last.
“Think of a steam engine that has its safety valve tied down when the pressure builds up. What happens? I think that Doug Casey’s famous comparison of the price (pressure) of gold and the contents of the Hoover Dam (money supply) going through a garden hose (limited amount of gold), if anything is liable to be grossly understated.”
“Speaking of new words,” a reader writes after yesterday’s episode: “If current U.S. foreign policy does little more than exacerbate already bad situations, does that make the United States little more than a master exacerbator?”
The 5: No comment.
Cheers,
Dave Gonigam
The 5 Min. Forecast
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